Global cereal supply and demand brief

World cereal balance to become tighter in 2006/07

Latest indications point to a tightening of the overall cereal supply/demand situation in the new 2006/07 marketing season. Cereal production in 2006 is forecast to decrease slightly, which coupled with an anticipated stronger growth in total cereal utilization, driven by a recovery in feed use and continued expansion in industrial use, would imply a sharp drawdown in stocks. With prospects for world trade in 2006/07 to stay at around the same high level as in the previous season, international prices of most cereals are likely to remain strong in the new season.

Table 1. Cereal Production1 ( million tonnes)

2005estimate

2006forecast

Change: 2006over 2005 (%)

Asia

885.4

898.0

1.4

Far East

775.4

787.5

1.6

Near East in Asia

72.0

73.1

1.6

CIS in Asia

28.5

28.6

0.3

Africa

128.8

125.2

-2.8

North Africa

30.3

35.1

16.0

Western Africa

42.9

41.0

-4.4

Central Africa

3.5

3.5

1.4

Eastern Africa

29.1

25.7

-11.9

Southern Africa

23.0

19.9

-13.5

Central America & Caribbean

34.8

37.3

7.1

South America

109.6

109.1

-0.4

North America

416.5

390.3

-6.3

Europe

422.5

423.4

0.2

EU 25

259.3

268.4

3.5

CIS in Europe

122.3

116.4

-4.8

Oceania

40.7

37.1

-8.8

World

2 038.4

2 020.5

-0.9

Developing countries

1 106.4

1 123.8

1.6

Developed countries

932.0

896.8

-3.8

- wheat

624.4

614.9

-1.5

- coarse grains

992.7

980.0

-1.3

- rice (milled)

421.3

425.6

1.0

1Includes rice in milled terms.

Note: Totals computed from unrounded data.

Cereal production to decrease slightly again in 2006

As the 2006 cereal seasons progress around the globe, latest data continue to point to a slight decrease in world cereal production to 2 020 million tonnes, about 1 percent or 18 million tonnes below the latest estimate of output in the previous year. However, at this level, world cereal output would still be the third highest on record, and above the five-year average.

FAO now forecasts world wheat output in 2006 at about 615 million tonnes, 1.5 percent down from 2005. This represents the second consecutive decline after the record crop of almost 632 million tonnes in 2004, but an output still well above the average of the past five years. The bulk of the reduction this year is expected in the United States, the Russian Federation and Ukraine. These decreases, along with several smaller reductions expected in such other important wheat producers as Canada, India, Pakistan and Romania, would more than offset the increases that are expected this year. The main producers where larger crops are expected in 2006, include Argentina, China, the EU and North Africa, mostly due to more favourable climatic conditions than for the previous season.

World production of coarse grains in 2006 is now forecast by FAO at about 980 million tonnes, down 1.3 percent from 2005 but still above the average of the past five years. Latest estimates confirm significantly smaller outputs in two major producing countries in the southern hemisphere – namely Argentina and South Africa - where crops have already been harvested. However, the bulk of this year’s decrease is expected to be accounted for by the United States, where the forecast is tentative as crops are still some way off harvesting, but the planted area is estimated to have been reduced by 4 percent in favour of less input-intensive crops, such as soybeans. The overall decrease in global output this year comes despite increased production in some other major producing countries, including Brazil, Mexico and several main producers in Asia, Europe and North Africa.

The ongoing 2006 paddy season is already well-advanced in countries located south of or along the equator, as some had already harvested their main paddy crop by May. Among northern hemisphere countries, the main 2006 crops are still at the development stage in parts of Asia and Africa, Europe and North America, but are barely at the planting stage in major producing countries in Asia where the development of the season largely depends on the pattern of the monsoon. This represents a major element of uncertainty in the 2006 production outlook that will persist at least until August, when the timing and distribution of the monsoon rains will be clearer. Although still tentative, the FAO current forecast for global rice production in 2006 stands at about 426 million tonnes (milled terms). This would be a new record level, but at just 1 percent up from 2005, would represent a significant slow-down in the growth in production compared to that of the past three years, reflecting concerns over rising production costs and expectations of a return to normal growing conditions after the previous year’s particularly favourable season. For those southern hemisphere countries where the 2006 season is fairly advanced, production is estimated to increase in Argentina, Australia, Indonesia and Madagascar. However, most of the expected growth in global production is likely to originate in the major producing countries north of the Equator, especially Bangladesh and China.

Table 2. Basic facts of the world cereal situation ( million tonnes)

2004/05

2005/06

2006/07

Change: 2006/07 over 2005/06 (%)

PRODUCTION1

2 067.6

2 038.4

2 020.5

-0.9

wheat

632.1

624.4

614.9

-1.5

coarse grains

1 027.1

992.7

980.0

-1.3

rice (milled)

408.5

421.3

425.6

1.0

SUPPLY2

2 480.1

2 503.3

2 478.7

-1.0

wheat

792.3

800.3

787.2

-1.6

coarse grains

1 174.0

1 182.5

1 165.0

-1.5

rice

513.8

520.5

526.4

1.1

UTILIZATION

2 014.4

2 030.5

2 062.0

1.6

wheat

619.5

625.3

627.0

0.3

coarse grains

979.9

986.7

1 014.4

2.8

rice

415.1

418.5

420.6

0.5

Per caput cereal food use (kg per year)

151.9

152.6

152.2

-0.3

TRADE3

243.9

243.5

243.2

-0.1

wheat

110.3

109.7

110.0

0.3

coarse grains

104.1

105.3

105.0

-0.3

rice

29.4

28.5

28.2

-1.0

END OF SEASON STOCKS4

466.4

461.7

416.7

-9.8

wheat

173.5

170.4

160.0

-6.1

- main exporters5

38.6

56.1

54.7

-2.5

coarse grains

193.6

189.0

150.6

-20.3

- main exporters5

48.3

93.1

97.1

4.4

rice

99.3

102.3

106.1

3.8

- main exporters5

68.6

66.6

67.2

0.8

Low-Income Food-Deficit Countries (LIFDCs)5

Cereal production1

812.8

849.0

861.8

1.5

excluding China and India

265.6

288.0

290.9

1.0

Utilization

897.7

1 076.3

1 081.7

0.5

Food use

639.0

651.3

657.5

1.0

excluding China and India

259.4

268.9

271.8

1.1

Per caput cereal food use (kg per year)

156.6

157.3

156.6

-0.5

excluding China and India

154.5

157.1

155.7

-0.9

Feed

160.2

162.9

162.7

-0.1

excluding China and India

41.4

43.6

42.8

-1.9

End of season stocks4

227.7

226.7

229.3

1.2

excluding China and India

48.1

51.9

52.2

0.6

1 Data refer to calendar year of the first year shown.

2 Production plus opening stocks.

3 For wheat and coarse grains, trade refers to exports based on July/June marketing season. For rice, traderefers to exports based on the calendar year of the second year shown.

4 May not equal the difference between supply and utilization because of differences in individual country marketing years.

Higher feed use to boost total cereal utilization in 2006/07

Based on current production forecasts for 2006 and total supply and price prospects for the 2006/07 marketing seasons, world cereal utilization is forecast at 2 062 million tonnes, up 1.6 percent from the estimated total utilization in 2005/06. At this level, world per caput food consumption of cereals is seen to remain nearly unchanged at around 152kg with a slight decline in the LIFDCs, to just below 157kg. In China, food consumption of wheat and rice continues to decline.

World wheat utilization is likely to increase marginally in 2006/07 to 627 million tonnes. The increase in total wheat utilization is less significant than in 2005/06 because of higher wheat prices and smaller supplies of feed wheat in world markets. In contrast, world coarse grain utilization in 2006/07 is forecast at 1 014 million tonnes, up 2.8 percent from 2005/06. The expansion is anticipated to be stronger than in 2005/06 when a drop in animal feed usage slowed the overall growth in total utilization. Assuming a rebound in poultry consumption and lower feed wheat supplies, feed use of coarse grains is forecast to rebound in 2006/07, to 624 million tonnes. In addition, the growing demand for ethanol is likely to boost industrial use of coarse grains (mainly maize) again in 2006/07, especially in the United States and in China. Total use of rice, predominantly used as food, is also forecast to increase by 0.5 percent. The food consumption of rice is forecast at 371 million tonnes, up 0.8 percent from 2005/06.

Sharp drop in world cereal stocks in 2007

Taking into account the new season’s production and consumption prospects, world cereal stocks by the close of seasons ending in 2007 are forecast at just 417 million tonnes, down 45 million tonnes, or 10 percent, from the start of the season. At this level, the ratio of world cereal stocks to expected utilization in the following season is forecast to drop to 20 percent, down from the estimated 22.5 percent in 2005/06. This anticipated drop in world inventories is driven by likely reductions in wheat and coarse grains stocks, while rice carryovers could increase slightly.

World wheat stocks are forecast to fall to 160 million tonnes, 10 million tonnes, or 6 percent, below the opening inventories. At this level, the global wheat stocks-to-use ratio is likely to be the lowest in three decades, at about 25 percent. Smaller inventories in major exporting countries as well as in the CIS account for most of the anticipated contraction in world wheat reserves. World coarse grain stocks by the end of national crop seasons in 2007 are also forecast to decline sharply, to 151 million tonnes. This represents a decline of some 38 million tonnes or over 20 percent. Most of the decrease is likely to occur in the United States where production is forecast to decline while domestic demand and exports are expected to increase. At this level, the world stocks-to-use ratio for coarse grains is likely to approach a record low of around 15 percent. On the contrary, preliminary forecasts for closing rice inventories by the end of the seasons in 2007 point to a continuation of the stock rebuilding process initiated in 2005, with inventories increasing to 106 million tonnes, up almost 4 percent. Most of this increase is expected in China and, to a lesser extent, in Thailand.

World cereal trade to change little in 2006/07

World cereal trade in 2006/07 is currently forecast to reach 243 million tonnes, close to the current estimate for 2005/06. Among the individual cereals, world trade in wheat is expected to increase marginally, to 110 million tonnes, whereas for coarse grains and rice, trade may decline slightly, to 105 million tonnes and 28.2 million tonnes respectively.

In spite of good production prospects envisaged by several wheat importing countries, especially in North Africa, several countries are likely to increase their wheat imports in the new season. One of the largest expansions is forecast for India where opening stocks are low. Several countries in sub-Saharan Africa are also likely to increase their wheat imports, namely Ethiopia, because of expected lower domestic production, and Nigeria, because of strong demand by the milling sector. Regarding exports , sales from major exporting countries are likely to increase following a general recovery in their supplies but a sharp decline in production is expected to curb exports from Bulgaria, the Russian Federation and Ukraine.

Based on the current production and utilization indications, world trade in coarse grains in 2006/07 (July/June) is seen to decrease slightly despite higher imports by several countries. Lower imports are anticipated especially in North Africa, Zambia and Zimbabwe, mostly as result of improved domestic crops. Smaller imports are also forecast for Brazil because of larger domestic production. In contrast, strong demand and tighter feed wheat supplies are expected to drive up imports by China, the Philippines and Canada. On the export side, sales from the United States, the world’s largest exporter, are expected to increase, supported by continuing large supplies in spite of strong demand from its own domestic feed and ethanol sectors. In contrast, exportable supplies are likely to be more limited in several other countries, most notably in Argentina, Canada, China, South Africa, the Russian Federation and Ukraine.

While world trade in rice in calendar year 2006 is expected to contract by about 3 percent, it would still be the second highest on record. For 2007, international trade is tentatively forecast to decline slightly. Lower shipments to Africa are mostly responsible for the expected contraction in world trade in 2006, with Nigeria accounting for most of that reduction, reflecting this year’s ban on milled rice imports. In Asia, aggregate imports are seen to remain unchanged as declines in some countries would be offset by possible increases in purchases by others, most notably by China, the Islamic Republic of Iran, and Iraq. Some increases in imports are expected in Latin America and the Caribbean, such as in Brazil because of production shortfalls. Regarding exports, Australia, Argentina and China are seen to increase their sales this year, while Viet Nam’s shipments are forecast to remain close to the Government target of 5.2 million tonnes given the prevailing tight domestic situation.

Prices to remain generally strong

International prices of most cereals have remained firm since the last report in April and further gains in prices seem likely considering the prospects for tighter supplies. The outlook for lower cereal stocks is also likely to provide support to prices in the new season.

In spite of some declines in recent weeks, the United States hard wheat export prices in June were up by about US$56, or nearly 39 percent, from the same period last year. While harvesting pressure may result in some declines in international wheat prices in the coming months, the overall tighter supply outlook is likely to support prices in the new season. Similarly, for coarse grains, prices are expected to remain firm or even rise as a result of several factors; including high energy prices and the continued strong demand for maize-based ethanol, a likely rebound in feed utilization, reduced global production and consequently smaller inventory prospects. Lower production in Argentina and South Africa and a decline in exports from China are also seen as supportive to coarse grain prices. In June, the United States maize export price (US No.2 Yellow) averaged US$109 per tonne, up US$11 from a year ago. Lower supplies have also pushed up Argentine prices, to US$107, US$16 more than in the previous year, while, in South Africa, tighter availabilities have led to more price gains in recent weeks. International rice prices have also been buoyant in recent months. The FAO rice price index rose to 108 in June, up 7 points from last year. Strong demand (specially for high quality rice) and a tightening of export availabilities in several major exporting countries that contributed to higher prices in recent months are likely to prevail at least until September/October when several northern hemisphere countries will start harvesting their main crops.